Interim Treasury Management in Action: A Case Study

Retailco is headquartered in southern Germany and was
acquired by a private equity group via a carve-out process. Annual turnover
exceeds 500m and it conducts its
business through a network of six substantial western European subsidiaries.
Prior to the corporate event, the organisation was decentralised.

My start at Retailco’s new holding company really did resemble being
parachuted into little-known territory. There was no chief financial
officer (CFO) and no holding organisation, accounting system, human resources
(HR) department or documented procedures. The staff of five did not have
employment letters. They were junior and middle grade accountants, and
there was nobody of controller or senior accountant stature. There was, of
course, no treasury function or any significant level of treasury
knowledge in the team. What the company did have was an energetic and highly
motivated chief executive officer (CEO) and a 380-page loan agreement.

Besides the loan agreement, there was a single bank account, whose
authorised signatories were all private equity investors. My
initial terms of reference were to research and understand Retailco’s
basic finance and treasury realities, manage all urgent requirements and
commence strategic research and development as soon as possible. It took
about a month to develop a full understanding of all the facts relevant
to routine treasury management, and to create a plan. It was agreed to
centralise treasury management, improve the control and visibility of cash
and liabilities, and fulfil investors’ cash and risk management priorities. 

It was important to understand Retailco’s business cycle, get a
sufficiently detailed picture of how the cash flows would need to work in
practice for solvent, profitable corporate operations.  Internal research
required an intensive and detailed process, which nvolved unravelling and
documenting the patterns of purchases and sales and other seasonal factors.

The plan that emerged was sufficiently detailed to reflect
management of all identified problem issues, and enabled us to focus on the
most critical issues relating to the main cash flow processes.

Loan Covenant Compliance

A further vital
issue was ensuring that all the terms of the loan covenant were met. I’m
not a lawyer, but covenant compliance depended on accurate analysis of a
large volume of complex legal language. I received invaluable advice,
both from the CEO and externally, but it was clear that, as interim
treasurer, the primary responsibility to get this right was all mine. 

Across the organisation, staff lacked the necessary knowledge and did
not understand the consequences of non-compliance. Among the most urgent
treasury tasks was to provide education that could achieve rapid
improvements in this area. Any failure in this mission would put the
liquidity of the new organisation under significant threat.

Cash Management: Initial Steps in Forecasting

Effective cash management is of paramount importance to private equity
investors, who need convincing that the operation is generating sufficient
cash to service the new debt portfolio, as well as sufficient liquidity for
all operating needs.

This makes heavy demands on the new
treasury operation, and its relationship with the subsidiary network.
Retailco had been a part of a highly decentralised organisation, with each
subsidiary managing its own cash. This cash had to be quickly measured and
mobilised centrally. It was most important to implement a sufficiently
robust cash forecasting system that would both meet investors’ and the
holding company’s financing needs. 

My task was to design a
solution, then educate relevant staff within the subsidiaries so they not only
understood the tactical and strategic importance of cash forecasting under
the new management regime but were also trained to provide effective support
for the forecasting process. Implementing this type of radical finance
policy and operating practice shift is a typical feature of interim
treasury management, requiring a mix of expertise, understanding,
communication and educational skills as well as diplomacy.

first step was to ask each subsidiary to provide central treasury with a
dependable cash forecast. We set up a rolling three month forecast cycle,
in line with the private equity investors’ priority objectives. The
subsidiaries reported exposures in their original currencies, whjich, as a
spin-off benefit, also helped with our foreign exchange (FX) risk management.
We researched the patterns, to help to fine-tune the process.We used a
standardised Excel template for all subsidiaries to submit their forecasts,
implementing over three months.

Developing the Banking

Another essential early requirement for
setting up a cash management function is getting control of and managing
the necessary banking relationships. Before the banking structure can be
developed, the number and nature of the bank accounts to be opened, and the
design of the related account management processes and infrastructure must
be completed. The process has to fully consider the controls set down in
treasury policy for paying and receiving, including identifying and
organising the appropriate signatories.

It takes several weeks
to complete the work necessary to open a set of bank accounts. It is
essential to develop a detailed and accurate understanding of the cash flow
patterns and demands of the business, so that an appropriate banking
structure can be swiftly put in place. Good planning is
essential as slippage in bank account administrative processes is likely to
be difficult to make up due to the necessary security and control overheads
that cannot be short-circuited. Since bank accounts are often pledged to
the lenders it is imperative that this is considered in the process.

At Retailco, we were starting with just one bank account. Urgent
administrative work was needed to implement the necessary account name
change and put new signatories in place. We decided on a conservative,
prudent approach in which two signatories were mandatory for the execution
of any payment.

Once this account was operating as required,
we implemented arrangements for a deposit account and also operating
accounts for our major foreign currencies. I was pleased when the CEO
informed me that administration of Retailco’s payroll had been outsourced
to a specialist provider, who would generate a periodic salary payment
file for authorisation by two signatories.

While the banking
situation was being modified, we were swiftly building up an accounts
payable (AP) file, which was initially largely composed of invoices related
to the expenses of closing the carve-out deal – including the costs of the
closing party! The beneficiaries included the inevitable lawyers and
notaries, some of whose bills were due for immediate payment.

early stages of this interim treasury management assignment could be seen
as a race against time to make the payments as they fell due and provide
practical and positive confirmation to the outside world – including banks,
the new shareholder, suppliers, actual and prospective customers, industry
analysts and potential investors – of the new organisation’s solvency,
liquidity and operational competence.

This required completing the
necessary research and follow-up actions with the loan agreement
administration, the operation of the bank accounts, an initial understanding
of the current and forecasted cash positions of the subsidiaries and
gaining a full picture of the sizes and due dates of all APs – all in all a
complex operation, with only one right result. 

Treasury Operations

I decided early on to work with just
one bank from the lenders’ group for all initial treasury requirements, in
an effort to minimise costs and keep operations  relatively simple and
low-risk. The chosen bank had the most extensive international presence of
the group, which influenced our selection along with our plan to develop cash
pooling quickly. It was not a good time to experiment with different
banks, as we had little scope to manage any errors encountered in trial and
error field tests of various complex banking services.

Interest rate risk management: One important loan
covenant requirement was that we should hedge a specified percentage of the
facility draw-downs against adverse market movements. We did this using
interest rate swaps, and also by purchasing caps. We used our lead bank
for the deals, and their pricing and execution processes were generally
satisfactory. It was a straightforward issue to document our treasury
policy for interest rate risk management based on the terms of the loan

We worked with the same specialist treasury services
company involved in my appointment to calculate the pricing for the proposed
derivative hedges, and to transact the actual hedge deals in the market.
The added value of the treasury service company’s risk management expertise
helped us to optimise our interest rate risk management performance, and we
enjoyed full visibility of the transactions’ pricing.

Foreign exchange (FX) risk management: Four
months into treasury operations, we had developed sufficient visibility –
as a spin-off information flow from the developing cash forecasting
activity – of the organisation’s FX risk exposure to enable us to start a
hedging programme. We settled on an initial treasury policy of hedging
with FX forward contracts in the relevant currency pairs, for a term of one
month for each currency pair, and using a cover ratio of approximately 70%.
Each deal would be rolled over on a monthly basis.

Soon after
this process was initiated, Retailco’s new CFO joined the company. He
worked with the CEO and myself to establish the corporate risk profile,
which was then documented in the treasury policy as a mandate to hedge 50%
to 80% of FX exposures.

Our bank performed less well in
servicing the business requirement for our FX hedging, through quoting
wide spreads. It required two to three months of effort to reach a point
at which subsidiaries were effectively reporting their FX exposures and
hedging requirements to central treasury. The exposure numbers were
reported in the cash flow forecast in their original currencies. We
started by focussing on direct future cash flows only – namely, through
looking at expected cash flows only and not at currency exposures arising
from currencies other than the transactional one. Over time, we analysed
the nature of each exposure, looking at currency pairs in turn as we
sought to implement hedging in manageable stages.

Achieving buy-in from the subsidiary
Retailco’s new central treasury business environment
required some profound changes in finance practice across the
organisation. A key role of the interim treasurer is to design and
document the new processes – and most critically to sell the value of the
changes internally.

The starting point was to explain the key
features of complying with the loan agreement. Further priorities related to
operating in the emerging banking environment, and of hedging centrally at
group level in line with the newly-developing treasury policy. The
challenge here is that many finer details could not be fully described in
the project’s early stages.

Among the key changes was that the
subsidiaries were no longer permitted to enter into guarantees, leases and
other financial obligations without central review and approval. The
actual execution of these would be performed at group level, to optimise
control, quality and visibility of financial risk management. The treasury
policy now being created effectively reflected the initial senior
management decision to centralise treasury management, and the urgent need
to address the priority cash and risk management control and reporting
requirements of Retailco’s private equity investors.

undertook face-to-face meetings with the relevant subsidiaries’
executives once matters were sufficiently well defined. Frankly, the
subsidiaries keenly resented the new treasury environment in its
early stages – they faioled to appreciate the underlying reasons for the
changes, or accept their value to either their local operations or the
greater enterprise. The CEO fully supported the change management process,
participating in the two- day workshops and related conversations as actively
as he could. His understanding of the terms and constraints of the loan
agreement was especially important in explaining the factors underlying
many of the changes, and therefore securing the subsidiaries’ acceptance. 

Early stages of the project were marked by slippage, and some
subsidiaries continued to execute transactions on their own account. As
the level of understanding grew, the new way of working was accepted and
embraced by the group.

Developing this close relationship with
the subsidiaries required substantial time and energy, but quickly produced
significant benefits, such as accepting the importance of regularly producing
a high quality cash forecast for investors, fully complying with the
organisation’s obligations in making interest payments and loan repayments
as covenanted, and of centrally controlling treasury operations.

Cash pooling issues: An important
objective for the interim treasurer is avoiding any liquidity squeeze as the
new enterprise gets up and running. We planned to do this by introducing
cash pooling, to optimise holding company financing and the group’s
interest income/expense performance.

German law imposes a
personal liability on CEOs of subsidiaries against financial
mismanagement, which can include the placement of funds with the group
if  its creditworthiness is deemed unsatisfactory. Accordingly, I  devoted
substantial effort to developing the group CEOs’ understanding of the new
central treasury organisation, and to secure their trust and confidence
through delivering full transparency in treasury management.

process took six months to reach conclusion, with each subsidiary’s surplus
cash voluntarily made available for sweeping and thus available to serve the
investor and holding company funding needs in the most efficient way.

Initially all the operations were performed manually via telephone,
using actual bank balances and cash forecasts as the basis for the sweep
amount calculations. Greater precision was achieved once daily cash
position reports were available, which gave an accurate picture of the
bank account balances available to the pool.
It is generally
accepted best practice for an organisation to minimise the amount of cash
stranded in subsidiaries’ bank accounts, and to reduce or eliminate
external interest costs required for funding the holding company.
Achieving really effective pooling performance took some considerable
efforts, of diplomacy, bank relationship and treasury management, but
proved well worth it. 


now we had enough detailed information to understand the requirements for
the permanent treasurer, since we knew all the essential treasury
processes, transaction volumes and operating complexities. It was clear
that a two-person team would be optimal for the next phase of development.
Writing  a job profile and description for the group treasurer
and initiating the selection project proved straightforward. The CFO’s
choice of candidate was in fact the person we ultimately agreed to hire.

My assignment ended with the successful completion of the cash
pooling exercise. A review was performed in a final close-out meeting
with the CFO and the permanent treasurer to ensure that all loose ends
were being addressed. The permanent treasurer was able to move straight
into the next planned phase of Retailco’s treasury evolution, focussing on
further centralisation, subsidiary mergers and implementing SEPA to
optimise central cash control and pooling.  


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